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You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Invisible Correction of the Stock Market

Until Tuesday, 12
September 2017, foreign or international investors kept selling their stocks in
Indonesia stock market so much, that their net buys position from the beginning
of the year, which almost reached Rp20 trillion in the last April, today it has
been minus aka turned net sells, precisely at minus Rp7 trillion. I also received
many questions, why foreign investors keep selling? However, the most important
thing here is not the reason why they’re getting out, but what are the effects
of these conditions to the market. And what is the best investment strategy to
counter these issues?

The comparation of domestic and foreign until 12 September 2017, please note that domestic investors are now dominating the trading value by 64% (usually only 50 - 55%).

Based on my
experiences, when foreign investors buy or sell stocks, it will affecting the
movement of Jakarta Composite Index (JCI) in short term – in this case about a
few weeks or months. So if they buy a lot, JCI will go up, otherwise if they
sell, JCI will go down. Actually in the long-term or years, compared to buy or
sell positions by international fund managers, there are many factors which
have more effect to the movement of JCI. But in shorter terms, let say in October
2011 and May 2012, JCI had dropped about 15 – 20% from its highest position,
and one of the triggers was the massive net selling of foreign investors in
those months.

Nevertheless, since
2016, here’s what happening: When foreigners buying, JCI would go up, meanwhile
when they were selling, JCI did not go
down – but went sideways. If you noticed, since the market hit by panic
selling in August – September 2015, JCI has never gone down by 10 – 20% from
its highest position, and this is
unusual. If we look at JCI movements before 2015, the index usually will experience
corrections in certain months, either in May, August, or even January.
Including in 2010, that although JCI was up 46% in the year, in May 2010 JCI
had once dropped more than 20%, from 2,971 to 2,501.

At a glance, it is
good that we are in a market condition where the JCI was stable and without
corrections, so nobody seems to lose money. However, this condition caused at
least two problems.

First, although JCI
corrections seem bad, but it is necessary so that some stocks that gained so
much until their price become overvalued, they could go back to their buying
level (ie fair or undervalued price). That is why the decline of stock index
often called market corrections,
because it actually brings back the stock prices to their own normal/low level.
Based on the history, if the stock prices continuously go up without any
healthy corrections, it could lead to stock
market crash. For example, in 2003, 2004, 2005, 2006, and 2007, the JCI
kept going up from 700 to as high as 2,700, or up more than 3 times in no more
than 5 years, and almost without any significant corrections. And thus, we have
already known what happened later in 2008.

Luckily, although
JCI has not been in correction since September 2015, but the increase in JCI in
the last two years were moderate at about 40% in total. In other words, the
increase was not as fast as in 2003 – 2007. What we have to remember is, the
macroeconomic conditions nowadays are relatively better than in 2015, so the
increase of JCI is reasonable, and I don’t think that the market crash in 2008
would happen again. But my point is, when JCI keeps going up without ‘break’, that
is not as good as it seems, and it actually makes our job harder in finding a
stock that is worth investing.

The Market is
Currently in Correction

Secondly, based on
JCI movement, we can say that Indonesian stock market has not yet in bear
period since August – September 2015. Still, when foreign investors are selling
their positions, some stocks start to decline significantly, and keep
declining. In August 2016, when the euphoria of tax amnesty sentiment started
evading, foreign investors that bought massively began to get out from market,
and at that time the JCI was stable at 5,400 levels (once dropped to 5,100s in
September, but quickly rebounded). Nevertheless, there were many stocks, which
surged up in June – July 2016, slowly but sure going back down. I remember when
Gajah Tunggal (GJTL) jumped from 700s to 1,700s in May – August 2016. However,
in September, it was turned down to 1,000s, and never rise again until today.

But GJTL was not
alone, because there were many other stocks including big caps (BBRI et al)
that tend to move down in September to the end of the year. But somehow, the
JCI only downed a little and finally closed at 5,297 on 30 December 2016 (compared
to the highest level in October at 5,470 point).

And in the second
semester of 2017, it is clear that the same condition is happening once again: The
JCI looks stable, but since May 2017, foreign investors kept selling. As the
results, many stocks were down, and
some of them even dropped to their lowest positions in the last five years. The
most visible decline was construction, but the sector stocks also got hit, no
matter they had good or bad fundamentals, and no matter they had low or high
valuations.

So if you said that
market has not been in correction since 2015, then it is not entirely right. If we look at the movement of stocks, and
not only the movement of JCI, here’s the fact: In September – December 2016, the
market were in correction, and recently the market were in correction once again.
Because on the other hand, the JCI seems to be stable, I could say thay these
are invisible corrections of the market.

And frankly, I
prefer a normal market correction where
the JCI is actually falling down. I mean, if we assume that the JCI is going
down, the strategy will be very simple: Immediately sell our holdings, in order
to collect cash for later shopping. That was what we do before the panic
selling in 2015. But what if the situations are like today? Where most of the
stocks are falling, but the JCI as the benchmark just kept rising??

The First Strategy:
Wait and See from Outside

Anyway, I spent a
lot of time to rearrange the investment strategy to counter these uncommon
market situations. Here are some options that you can do.

First, we can apply
the normal strategy when the market is in bearish: You can sell some of your
stocks, hold the cash, and wait until the beginning of 2018. Why should we wait
until the beginning of year? Well, reflecting to the market situation in second
semester of 2016, even the big caps that almost unshakable were finally dropped
at the end of the year (December) and JCI itself was down but not
significantly. The cause of declining stocks at that time is also similar to
current situation: Foreign investors keep selling. The important thing is, we
would never know when these international fund managers will get back to
market. Until today, clearly there is no certain positive sentiment that could
trigger foreign inflows to the market. Just like the domestic investors,
foreign investors usually only buying at the beginning of the year.

The weakness of this
strategy is that you will miss the opportunity at certain stocks that keep
moving up. Because when JCI dropped, most stocks would also drop. But when the
JCI is stable like today, then some stocks are keep going up (albeit most
stocks are still going down, because of ‘invisible market correction’ that we
mentioned above). Just like in 2016, when coal stocks started rallying in
September – October.

But only with this
strategy, you will not bear any risk that your stocks going down (because you
are holding cash) and most importantly: If you have some particular stocks as buying
target, you will only have to wait for a few months, and later you will earn
much profit in 2018. For example: In 2016, stock of Bank BNI (BBNI) was only moving
sideways in range 5,000 – 5,500, even dropped to 4,000 in May. However,
entering the 2017, BBNI finally rallied and now is at the level of 7,000s,
making profit more than 40% just in few months (or even 70% if you bought at
4000s).

Not only BBNI, there
were many other stocks that went nowhere in 2016, and only rose again in 2017.
What I mean is, although you will be late in ‘catching the train’ with this
strategy, but you do not have to worry because there will be more other trains
waiting for you at the beginning of 2018. In 2016, banking stocks almost made
no profits at all and it seemed bad, because the JCI gained 15.3% in 2016. But
in 2017, as you can see, BBRI et al gained the most (compared to other big cap
stocks).

However, applying
this strategy really needs an extra patience and I know exactly that some of
you are not patient enough to wait even for one day. Therefore, the following
is the second strategy.

The Second Strategy:
Selective Buying

Secondly, you can still
buying/holding certain stocks, but this time you have to be more selective. In
the past few months, I have observed the stocks that are moving up, and there are
two common similarities: 1. They are quite popular stocks/companies, not only in
the eyes of investors but also common people, 2. Technically, they are in
uptrend since the beginning. The question is, how do those two similarities
happen?

And here are the
possible reasons. Some time ago, the Indonesian Central Securities Depository (Kustodian
Sentra Efek Indonesia, or KSEI), claimed that the number of retail investors in
the market reached 1 million accounts, tripled from 2013 that only had 350,000
accounts. Thanks to the campaign of ‘Yuk Nabung Saham!’ (let’s invest in
stocks!) and other promotions by the IDX et al. Even though these new investors
did not directly deposit a huge amount of money to their securities accounts
(because nowadays you can open a stock trading account by only depositing Rp100,000
or about US$ 10, compared to minimum deposit of US$ 500 in 2019). Thus, it is clear
that the stock market nowadays are dominated by domestic investors (not
dominated by foreigners as before), which some of them are new faces that are unexperienced, and still needed time to
learn how to analyze stocks, etc.

And if you are a newbie
in stok market, then what shares you would buy for the first time? Exactly! The
shares of a company that you know well, such as Unilever Indonsia (UNVR), Telkom
(TLKM), or Bank BCA (BBCA).

Then secondly, the
stocks should be moving up, aka in uptrend. Logically, if some people without
enough knowledge (aka newbie) is interested to buy certain stock, but the stock
is in downtrend, then automatically he/she will be afraid to buy it because it
seems that the stock will go down further. However, if he/she heard that the
stock A is going up, then he/she will buy it, hoping that the stock would go up
further. This is simple logic if you are buying stocks without analysis (and
currently, the market is crowded with this type of investors/traders).

Consequently, if you
look carefully in these few months, the stocks that are going up are keep going
up, meanwhile the stocks that are going down keep going down. For some moments,
it seems like value investing rule is
not working. Normally, if there are fundamentally good stocks that dropped,
the decline will stop at certain point where investors assuming the valuations are
low enough. But what happening today is, if a stock is going down, it could go
down to any level, simply because either foreign or domestic investors are not
going to buy it.

Thus, for the second
strategy, besides determining the criteria that the company have to be
fundamentally good and in low valuation, you also have to add at least two more
criterias, which is 1. The company is popular in name, and 2. The stock price
is in uptrend, or at least not in downtrend. The good news, though some stocks
that in uptrends, their valuations are not low anymore, but there are some uptrend
stocks where the valuation (PER and PBV) are low. Therefore, you still have
choices of stocks to buy. (Note: In determining if a stock is in uptrend or downtrend,
you have to look at its chart for at least 6 months before, no shorter than
that).

However, the second
strategy above certainly has risks, where stocks that have gone up high could
go down if some people do the profit taking, and it is clearly not in accordance with value investing rule, because
we are supposed to buy stocks that nobody else buy it, not join the crowd
instead. In this case, you can take the first strategy, which just wait and see
outside. Alternatively, you can keep buying stocks, but leave a big amount of
cash, like 30 – 50% from your total portfolio. Psychologically, holding cash in
big amount will help us to stay calm facing today’s uncommon market situation,
including helping us not to feel bad to sell stocks in loss positions, if
necessary.

And if you choose to
wait and see outside, then remember, today is already September, which mean
that next year is only 3 – 4 months to go. Anyway, whichever strategy you
chose, you have to realize that if your today’s investment performance is not
satisfying, you are not alone as other investors also have the same problems,
because the JCI is not as stable as it seems. And also remember that the market
will not be forever unfriendly like it is today, but there will be time for Mr.
Market to be friendly once again. So, good luck!

Original article was written and published (in
Indonesian Language) on September 13, 2017. Any inquiries, contact the author
(Teguh Hidayat) by email teguh.idx@gmail.com.